2% of 2% = Failure

By Dan Nolan

Robert and I stood on the hill overlooking the 5-county area of metro Denver. He says “Look at all those houses out there…if we get 2% of 2% of those houses as clients…do you know how many jobs that would be?”

Yeah, that company is out of business now, fyi.

2% of 2%. I had heard it before and sadly since; the absolutely wrong approach to doing pro formas for a business plan.

Small Business people like to dream of what they think is possible, and then justify their dreams with numbers that aren’t based in any logic. Why did Robert feel he could get in front of 2% of the whole Denver metro area, and that he could then sell to 2% of that sub group? Did he really think that 2% of the local population was his target client? Basing your business plan on illogical numbers is a sure fire way get your pricing wrong, set your goals wrong, and end up going out of business.

Here’s the RIGHT way to do it:

Rather sit there with dreams of grandeur of selling to 2% of 2%…simply figure out what you need to reach your budget, and then get that number of clients. Hold on….that seemed to simple…it must be wrong, let’s look at that again closer:

If Robert’s fixed cost are $800,000, and his variable cost per sell are 50% of the sales price, and his average sales price is $30,000…how many houses does Robbert need as clients to break even (BE)? In the following models, X will equal the number of houses Robbert needs as clients in a year.

First you have to figure out the Break Even Point (BEP):

$800,000 +(X*($30,000*.5)) = BEP

Now, with that, set it equal to your Revenue stream:

$800,000 +(X*($30,000*.5)) = X*$30,000

Solve for X:

$800,000 +$15,000X = $30,000X

$800,000 = $15,000X

53.3 = X

Round up to 54.

And there it is. Robert needs 54 clients this year to break even. If he gets 55 clients, then he gets $15,000 of net profit (before taxes and crap). From that, you can figure out how many he would need to reach profit goals. Doesn’t that seem a lot more obtainable then standing on a hill and looking down over 2.5Million people and saying 2% of 2%?